Keeping the Luxury Market Profitable - Xavier Drèze

Keeping the Luxury Market Profitable
AN INTERVIEW WITH:
Dr. Xavier Drèze
Assistant Professor of Marketing, The Wharton School, University of
Pennsylvania
April 29, 2009
Dr. Xavier Drèze investigates marketing databases, frequent-shopper program design, movie sales and other
issues related to retail and digital marketing. His research has been published in academic journals, including the
Journal of Marketing Research, Marketing Science and the Journal of Marketing. Dr. Drèze earned the prestigious
Alpha Kappa Psi award for best paper published in the Journal of Marketing in 1994 and the award for best paper
published in the Journal of Retailing in 1995. He received his PhD and MBA from the University of Chicago and
his MS from the Université Catholique de Louvain, Belgium.
In this interview, Dr. Drèze discussed the differences between luxury and premium goods and the value of luxury
marketers making money no object, even in a recession.
eMarketer: For the purposes of our report, affluent consumers are defined as consumers with an annual income
of $100,000 or more. How is the recession affecting these consumers?
Dr. Xavier Drèze: My definition of affluent would usually be more in the half-million range. Those people are going
to be hurt a lot less than those making $100,000 a year. Then the question is, “Is it okay to spend money when
other people are hurting?”
Marketing to people in the $100,000 annual range has gone up, and it’s mostly marketing based on being a good
deal. There’s a big difference between luxury goods and premium goods.
eMarketer: How would you define the difference?

“Premium products, like Lexus or BMW, are going for performance, and they’re
always going to position it as a great value…Luxury marketers don’t talk about
price…It’s about quality and service.”
Dr. Drèze: Premium products, like Lexus or BMW, are going for performance, and they’re always going to
position it as a great value. The Lexus people will tell you, “You can’t buy a car like this for cheaper.” Luxury
marketers don’t talk about price. You don’t buy a Rolls-Royce because it’s a good value. It’s about quality and
service.
A lot of the brands that a common person would consider luxury are not real luxury. People don’t know of a lot of
the real luxury brands—it’s an insider game. As you get into the market, you learn about new brands you didn’t
know existed.
eMarketer: So which brands are more affected by the recession?
Dr. Drèze: Premium brands are affected more than luxury brands, because price is part of their communication
and selling point. I see a lot more push by those brands to convince consumers it’s a good time to buy. Brands like
Tumi are doing a lot of e-mail marketing now advertising sales. You see the same thing even with West Marine, a
big sailing superstore.
You don’t see that from the real luxury brands, but they also use e-mail marketing. Louis Vuitton will send you stuff,
but it’s never, “This is a great deal.” It’s all about, “This is a great product.”
eMarketer: Is a luxury brand that starts talking about value demoting itself to a premium brand?
Dr. Drèze: Yes. A lot of luxury brands, like Louis Vuitton, will sell scarves, belts and key chains that are affordable
to a lot of people, but they’re never pushing those.
eMarketer: Just like Tiffany & Co. and the smaller sterling silver items it sells. No one wants to say, “You can get
this great keychain here.” They want to sell engagement rings.
Dr. Drèze: Right, and they put a very strict limit on how many keychains they sell, because they don’t want
everybody to have a Tiffany keychain. They want to use those products as an entry product into the line, so they’re
going to limit the amount of products.
There’s a big risk for a luxury brands letting in the masses. You’re trying to build a relationship with someone who’s
going to come back. The wrong consumers might buy a premium item that’s on sale. Five years later, when they’re
going to replace it, it’s not going to be on sale and they’ll go back to another brand. Luxury brands want consumers
who will still be there when the economy gets back to normal.
BMW, as a premium brand, is playing a volume game. They want to sell a lot of cars. Ferrari, in contrast, is
artificially creating scarcity. If you want a new one, there’s a two-year waiting list. That also means they’re going to
be less hit, because in the recession, the waiting list goes from two years to maybe a year and six months. But
there’s still a waiting list, so they don’t need to lower the price.
eMarketer: Are affluent consumers doing more research before making purchases now?
“Rich doesn’t mean that you waste money. The affluent are the biggest deal

seekers…They negotiate with a brand store or buy from a reseller, where they
can get 20% or 30% off.”
Dr. Drèze: Yes. Rich doesn’t mean that you waste money. The affluent are the biggest deal seekers. They’re used
to buying really expensive stuff, and a lot of what they buy doesn’t sell that much. The average high-end watch stays
in the store for a year and a half. They don’t sell 58 a day. They sell 20 a month or a year. Many affluent consumers
don’t pay retail value. They negotiate with a brand store or buy from a reseller, where they can get 20% or 30% off.
eMarketer: Let’s go back to e-mail marketing.
Dr. Drèze: Many of the luxury brands do e-mail marketing and it’s good, especially now, because as the customer
base shrinks, you want to re-target them and e-mail is the best way to target. In the general population, not that
many people are going to be responsive to luxury brands. Luxury brands are using e-mail to re-emphasize the
service aspect of what they’re doing, saying to their target list, “We know you, we understand you and here is our
number if you need to talk to us.”
The true luxury goods usually control the order distribution points, so their own store and online experiences are
consistent with the brand. User-friendly is not always what they’re trying to go for. They’re not trying to make it easy
for consumers to buy, because they don’t want to give the impression that they need you more than you need them.
If you go into a Ferrari store, they may not even talk to you. You need to be recommended by somebody, and they
sell their cars first to their current customers and then rank order other customers. There’s a whole process of
being vetted by the marque in order to buy it. That makes them more recession-proof because they can just go to
their client list.
eMarketer: With luxury brands, personalization is a big part of the service.
Dr. Drèze: Yes. During the recession, it’s not about dropping the price. It’s about personalized service. You see
that with airlines. Frequent fliers are treated really well during a recession.
Luxury good manufacturers have always done custom products, but they don’t always make money on it. Some of
it’s a customer-retention policy for the really good customers, not just anyone. In the recession, they’re a little more
careful.
eMarketer: Is marketing luxury brands to aspirational consumers as important during the recession?
Dr. Drèze: Yes. When you go down the street in an expensive car, people look at you with envy, and that’s part of
the product experience. It’s very possible that Chanel will advertise on a billboard in Times Square, not to try to sell
an ordinary person clothing or perfume, but to make sure that when that person sees somebody in a Chanel dress,
they know it’s Chanel.
“You see Lamborghini ads in Delhi or China where the roads can’t even handle
the car yet. It’s seeding the brand in the mind of people, getting them to dream
about the product.”
You see Lamborghini ads in Delhi or China where the roads can’t even handle the car yet. It’s seeding the brand in
the mind of people, getting them to dream about the product. They may not make money now, but it’s a long-term

game.
eMarketer: What luxury brands are doing really well now?
Dr. Drèze: Lamborghini seriously upped its game. They’ve become a critical high-end exotic sports car
manufacturer, instead of just being outrageous. Louis Vuitton is doing well. The Swatch Group owns Swatch and
now something like 50% of the high-end watchmakers. They’ve been really good at reviving the brands, investing
money in and really capitalizing on their history.
eMarketer: What luxury brands aren’t doing well?
Dr. Drèze: If everybody is buying the luxury brand, then that brand is in trouble. That’s what happened to Burberry.
In England, there are a bunch of low-end products, like a cap or scarf. Lower-class young people they call “chavs”
were starting to wear the brand, and you could go down the street and see everybody with that recognizable
pattern.
Luxury brands need to make it difficult for people to buy them. They need to create that desire, that dream that’s
never about price. That’s what insulates them in the recession.
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